Report and Recommendation of the President to the Board of Directors Project Number: 41926 February 2009 Proposed Loan Zhangbei Wind Power Project (People’s Republic of China) In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP. CURRENCY EQUIVALENTS (as of 9 February 2009) Currency Unit – yuan (CNY) CNY1.00 = $0.1462 $1.00 = CNY6.84 Currency Unit – Hong Kong dollars (HK$) HK$1.00 = $0.129 $1.00 = HK$7.75 The exchange rate of the yuan is determined in relation to a weighted basket of currencies of the trading partners of the People’s Republic of China. In this report, a rate of $1.00 = CNY6.8 is used. ABBREVIATIONS ADB – Asian Development Bank CDM – Clean Development Mechanism CECIC – China Energy Conservation Investment Corporation CECIC-WPI – CECIC Wind Power Investment Company CER – certified emission reduction CMI – Carbon Market Initiative CO2 – carbon dioxide DSCR – debt service coverage ratio EIA – environmental impact assessment EIRR – economic internal rate of return GDP – gross domestic product GHG – greenhouse gas HKC – HKC (Holdings) Limited HKE – Hong Kong Energy (Holdings) Limited NCB – national competitive bidding NCGC – North China Grid Company Ltd. NCPG – North China Power Grid NDRC – National Development and Reform Commission O&M – operation and maintenance PRC – People’s Republic of China SEMP – social and environmental management plan SGCC – State Grid Corporation of China SOE – state-owned enterprise VAT – value-added tax WTG – wind turbine generator WEIGHTS AND MEASURES dB (decibel) – unit of sound GW (gigawatt) – 1,000 megawatts GWh (gigawatt-hour) – 1,000,000 kilowatt-hour km (kilometer) – 1,000 meters km2 (square kilometer) – 1,000,000 square meters kV (kilovolt) – 1,000 volts kW (kilowatt) – 1,000 watts kWh (kilowatt-hour) – 860.42 kilocalories m (meter) – 100 centimeters Mt (million ton) – 1,000,000 tons MW (megawatt) – 1,000,000 watts s (second) – unit of time t (ton) – 1,000 kilograms TWh (terawatt-hour) – 1,000 GWh W (watt) – unit of active power NOTE In this report, "$" refers to US dollars, unless otherwise stated. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Directors General K. Gerhaeusser, East Asia Department (EARD) P.C. Erquiaga, Private Sector Operations Department (PSOD) Directors A. Terway, Energy Division, EARD J. Yamagata, Infrastructure Finance Division II, PSOD Team leader K. Zheng, Senior Energy Economist, EARD Team members C. Gin, Counsel, Office of the General Counsel H. Kimura, Investment Specialist (Infrastructure), PSOD X. Liu, Project Officer (Energy), PRC Resident Mission, EARD A. Maxwell, Energy Specialist, PARD T. Oi, Energy Specialist, EARD Y. Qian, Principal Economist (Financial Sector), EARD D. C. Song, Guarantees and Syndications Specialist, Office of Cofinancing Operations S. Suphachalasai, Young Professional (Economics), Economics and Research Department S. F. Wong, Senior Financial Analysis Specialist, EARD X. Zhou, Investment Officer, PRC Resident Mission, EARD CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Energy Sector Performance and Challenges in the PRC 1 B. Wind Power Development in the PRC 2 C. Development Challenges in Hebei Province 3 D. ADB Operations 4 III. THE PROPOSED PROJECT 5 A. Project Description 5 B. Project Sponsors 7 C. Project Operational and Financial Performance 9 D. Environmental Aspects and Social Dimensions 10 E. Development Impact 11 IV. THE PROPOSED ASSISTANCE 12 A. The Proposed Loan 12 B. Justification 12 C. Main Risks and Mitigation Measures 13 D. Investment Limitations 13 E. Anticorruption Policy, and Combating Money Laundering and the Financing of Terrorism 13 V. ASSURANCES 14 VI. RECOMMENDATION 14 APPENDIXES 1. Design and Monitoring Framework 15 2. Development Effectiveness Framework 17 3. Wind Power Development in the People’s Republic of China 19 4. The Sponsors of the Zhangbei Wind Power Project 23 5. Brief Introduction to the Power Offtaker 28 6. Financial Evaluation of the Project 30 7. Economic Evaluation of the Project 31 8. Summary Initial Environmental Examination 35 9. Summary Poverty Reduction and Social Strategy 45 10. ADB's Nonsovereign Operations in the People’s Republic of China 47 LOAN AND PROJECT SUMMARY Borrower CECIC HKE Wind Power Co., Ltd., which is indirectly owned by China Energy Conservation Investment Corporation (CECIC) and by HKC (Holdings) Limited (HKC). Classification Targeting: General intervention Sector: Energy Subsector: Renewable energy generation Themes: Environmental sustainability, sustainable economic growth, private sector development Subthemes: Cleaner production, control of industrial pollution; fostering physical infrastructure development; public–private partnerships Environment and Category B under the Environment Policy (2002) of the Asian Social Assessment Development Bank (ADB), category C under ADB’s Involuntary Resettlement Policy (1995), and category C under ADB’s Policy on Indigenous Peoples (1998). Project Description The Zhangbei Wind Power Project (the Project) is a 100.5 megawatt wind power facility to be constructed on a build-operate- own basis in Zhangbei County, Hebei Province, the People’s Republic of China (PRC). Annually, the Project will generate 250.9 gigawatt-hours of electricity from wind resources, replace the usage of 86,118 tons (t) of standard coal for power generation, reduce carbon dioxide emissions by 242,127 t, and conserve 5,900 t of freshwater. Development Impact The Project supports the strategy of the Government of the PRC (the Government) to promote renewable energy development, aiming to increase the total installed capacity of wind power by about five times, from 6.1 gigawatts in 2007 to 30.0 gigawatts by 2020, and to enlarge the share of renewable energy in the country’s power generation portfolio from 8% in 2007 to 20% in 2020. The Project will lessen reliance on coal burning for power generation and abate greenhouse gas emissions, thereby contributing to the mitigation of global warming and climate change. The Project will enhance the utilization of indigenous renewable energy resources, improve wind farm management practices, provide opportunities for job creation and income growth, raise fiscal revenues, upgrade local infrastructure, and protect the regional ecological environment, thereby contributing to poverty alleviation and sustainable development in the region. ii Project Sponsors and CECIC is the only national-level enterprise owned by the Guarantors Government that is specifically tasked with improving energy efficiency, developing renewable energy, and protecting the environment in the PRC. CECIC started as a government agency in the former State Planning Commission and was registered in 1988 as a company under the PRC Company Law. Since 2003, it has consolidated its operations in (i) wind power development; (ii) waste management, including biomass power generation; (iii) water supply and sanitation; and (iv) energy efficiency projects. CECIC attaches high priority to wind power development in its long-term corporate development strategy. With a total of 996.5 megawatt wind power facilities under operation, construction and preparation, CECIC has accumulated the capacity and experience to become an industry leader in designing, building, and operating large wind farms in the PRC. Established in 1973 as Kumagai Gumi (Hong Kong) Limited, HKC has grown over the last 35 years into one of Asia’s most specialized investors and contractors for civil engineering, infrastructure construction, and energy development. Listed on the Hong Kong Stock Exchange, HKC has focused its developmental strategy on commercial properties, infrastructure extension, and alternative energy. Financial and Economic Without taking into consideration revenues from the sale of Performance of the certified emission reductions, the Project is expected to yield a Project financial internal rate of return of 7.49%, which is above the weighted average cost of capital. The Project’s economic internal rate of return is 17.4%, which indicates strong positive economic externalities and is higher than the social discount rate of 12.0%. Environmental and The Project harnesses wind resources on undeveloped land and Social Issues affects no indigenous peoples. As the site is vacant, resettlement is not needed. Disturbances during construction will be small, transient, and properly managed. Perceptible environmental impacts during operation will be mostly noise and visual intrusion, but both are minimal because of the distance between the wind turbines and the nearest settlements and the relatively low scenic value of the project site. The Borrower has formulated a social and environmental management plan and allocated sufficient funds to implement it to further minimize negative environmental and social impacts and to restore and protect the ecology of the project site. iii Justifications The Project merits ADB support because it helps promote sustainable development in Hebei Province and diversifies electricity production toward renewable resources in an environmentally friendly way. The Project enhances public–private partnerships and encourages foreign participation in wind power generation, which is crucial for the further development of the nascent sector. The Project is consistent